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Business has changed. Has yours?

We recently hosted a webinar - discussing the findings of our latest research - The £10 billion profit opportunity - and their implications on business today. This post recaps the discussion and poses some thought prompters for what looks to be another turbulent 12 months ahead.

Click the image to watch the on-demand recording of the research discussion

Heard the one about the boiling frog? You almost certainly have - it's a very old anecdote often used as a business metaphor.

It suggests that a frog in a cold pan of water that's being heated wont realise its in peril because the temperature change is gradual. Eventually, the water boils and the frog perishes.

Despite its venerable origins, it's a pretty good analogy for the change that's been happening around business spending over the last couple of decades.

As a recent Proxima webinar highlighted, labour's share of costs within business has been steadily declining. Yet many organisations are still focused on slicing into headcount to bring down overall spending.

Proxima's research shows that labour costs are now less than 13% of revenues (based on the available data from FTSE350 companies). Even in the past three years, that figure has declined from nearly 16%.

But why?

It's actually simple. Over the last 25 years the cost base of large organisations has been externalised.

Henry Ford used to own rubber plantations, mines, steel furnaces and glass works - now car manufacturers are assemblers of components made by suppliers.

This is as true for costs that are core (to a business) as it is for non-core - almost every organisation uses external marketing agencies, security firms, logistics providers, consultants and so on.

This shift means organisations ought to be able to achieve much more significant savings from addressing the larger, and growing, slice of outgoings  the procured goods and services. A 1% reduction in labour, on average, will boost EBITDA by just 0.8%. But a 1% fall in non-labour costs yields a 3.6% rise.

As Jamie Lyon, ACCA's head of corporate sector, explains in the discussion, that fact alone pushes the need for efficiency in procurement firmly into the finance function's orbit. "This is an issue of visibility and ownership for the finance function", he says. "Finance typically doesnt own procurement, but has to account for and explain the finance implications of their decisions. So this is about extending finances influence across the organisation and driving transparency in the cost base".

Getting finance involved - and using its skills to create transparency around those decisions throughout the organisation - is a key step in avoiding the boiling frog problem.

Change is imperative and urgent

Regulatory change, globalised markets and increasingly specialist suppliers will only continue to push more organisational costs outside businesses. More importantly still, businesses are realising two important factors explored in the webinar.

First, the "new normal" for business - a sluggish economy, unpredictable markets and the potential for large shocks - means organisations need to be able to flex. Fast reaction demands brainpower inside businesses to support and execute strategic decisions - so cutting headcount soon becomes counterproductive as a means of delivering sustainable support for profitability.

And second, it also means having more creative and progressive relationships with external suppliers. Businesses need to come at procurement from a much more holistic perspective. (As Lyon points out, finance reaches across any organisation, so it's ideally placed to help break down those silos). Only by addressing strategic issues in partnership with their entire supply chain can they deliver the kind of change that will sustain their bottom line.

Interestingly, on the customer side of the supply chain, businesses have been shocked into change. The emergence of the web as a sales tool and the rapid arrival of global competition has forced every business to think differently about reaching and managing customers.

The heat on the supply side has been building much more slowly. But as our research shows, its no less compelling. Smart management teams are starting to address it - but its not too late to for every business to act on procurement and avoid being boiled alive.

Post a comment

Mukunda Raj Prakash

A new definition of the term "labour" may be thought of.

Rahul Magan , MBA Finance

- I agree that business has changed and keep changing because of huge uncertainity in the financial world all the times and thanks to national governments for their ineffective attitude which makes business men scare all the times.

Chuanmin Xie

Although the labor cost declined, but the related service is covered by outsourcing. Maybe the business has changed, but is the cost really measured exactly?

Roberta Hogan

Over the last few years we have seen companies deplete their resources (senior personnel & +50 year old staff) in favour of short term bottom line benefits to satisfy their shareholders. This strategy has worked in the past for short term regional recessions. Unfortunately it has now weakened most firms internal ability to strategically manage a volatile market which still exists in 2013 due to a shortage of "technical" knowledge. Most companies have staff in management aging around the mid 40's or less who have moved up through the ranks without having the scope of knowledge beyond their current positions. Most positions during their time have been a single focus function with little emphasis on creativity or strategic thinking.

Simon Thornton-James

Sadly, I'm not convinced that we'll witness any substantial change. So much still depends on whether procurement has a seat a board level. In many cases it doesn't and my experience - for what it's worth - is that procurement more often than not is used tactically rather than embedded as a strategic function involved in setting corporate goals.

Headcount still appears first in line for cost cutting despite prima facie evidence to the contrary. However how much 3rd party costs are being driven as a direct result of reduction in direct labour costs is perhaps an interesting question.

Chris Parrack

I suspect companies will continue to axe people, which is incredibly short sighted, because they find the concept of driving cost out in other ways too hard to grasp. If they work in just a price down, cost down environment then fewer people is their only way to make lasting savings!

Mark Stamp

From my experience within the IT field, whether that’s right sizing, right sourcing or cost containment, business's will still want to optimise their IT budget. As Taiichi Ohn said “Costs do not exist to be calculated. Costs exist to be reduced.” – Taiichi Ohno, considered the father of the Toyota Production System.